Video 4:06
Carbon price crash creates budget pressure

Leigh SalesUpdated
Wed 17 Apr 2013, 9:48 PM AEST

Australia heads towards a blackhole of several billion dollars by 2015 as the carbon price falls in Europe.

Transcript

LEIGH SALES, PRESENTER: The Federal Government is facing budget pressure on another front, with a falling carbon price in Europe heading Australia towards a black hole of several billion dollars by 2015. Overnight, carbon permits in Europe were trading for just a little over $3. But Australia's revenue forecasts rely on a price almost three times that.

Warwick McKibbin of the Australian National University was a board member of the Reserve Bank for a decade and he joined me from Perth.

Warwick McKibbin, the federal budget currently assumes a $29 carbon price in 2015 when Australia's carbon trading scheme links to the EU carbon market. Given that the current price is just a bit over $3, how realistic is that forecast?

WARWICK MCKIBBIN, FMR RESERVE BANK BOARD MEMBER: Well I think it's shown to be fairly unrealistic and this will have serious implications, both for the policy in Australia and the revenue for the budget.

LEIGH SALES: So should Australia then revise that modelling?

WARWICK MCKIBBIN: Well I don't think - the problem's not with the modelling, the problem is with the policy that's based on forecasts where revenue is assumed to be the forecasted number and the compensation's already paid and locked in the budget. It's just bad policy design. It's not Treasury's forecasts that are wrong, it's the policy the Government has put together based on those forecasts.

LEIGH SALES: You mentioned that it will have an impact on the budget revenue. In what sort of magnitude would you expect that to be?

WARWICK MCKIBBIN: Well, it's quite complicated, but if you think about 500 million tonnes of CO2 emissions in 2015, every dollar you lose is half a billion dollars. So my estimate, a realistic price, taking into account the complexity, could be around $10 a tonne, so you'd probably lose around $6 billion out of that budget. That could be an upper bound.

LEIGH SALES: So, what does that mean then in terms of the way the carbon scheme is designed right now with the two price rises locked in before Australia even joins that EU scheme?

WARWICK MCKIBBIN: Well, it's just a badly thought-through system. The fixed price was too high. Lots of reasons for that - bad advice, designed by committee, not by experts. But switching to a carbon trading mechanism using permits from an unstable market was just really strange policy. I didn't understand it. I've argued against it for a very long time, yet the Government's gone ahead with it on the assumption that they could have been right. Well, it looks like they won't be.

LEIGH SALES: What's caused the slump in the carbon price in the EU?

WARWICK MCKIBBIN: Two factors. One is at the beginning of the scheme, an overallocation of rights, which means there were too many permits for the market. Secondly, with the economic slowdown in Europe, there's just a lot less carbon emissions in the system, so therefore there's not as much permit demand and therefore the price has been falling.

LEIGH SALES: Could the carbon system in the EU collapse altogether?

WARWICK MCKIBBIN: It could. In fact I think overnight it probably came close to just that. The problem is that the Europeans have much bigger problems to deal with at the moment than their CO2 emissions. It was always a political system, the carbon trading system in Europe, and it stays that way in many other countries and Australia has locked themselves into a very strange policy of locking into an unstable economy.

LEIGH SALES: So, in your view, what should the Government do now?

WARWICK MCKIBBIN: Well, the Government should have got this right the first time. The Garnaut report should have got it right. What they should do is they should revise the strategy in 2015. It will be a different government most likely in 2015, so there has to be initially a bipartisan rethink. Now, that won't happen between now and September, but hopefully after September there'll be some reconsiderations on how to do this properly.

LEIGH SALES: Given that the Coalition has promised to dump the carbon tax if it's elected, does that mean that this situation in Europe doesn't pose any sort of problem for a future Abbott Government?

WARWICK MCKIBBIN: Well, it depends on what system they will have to put in place and they've talked about a particular system that's a baseline credit system. I think they can move from where we are to where we need to go without violating their promises by being closer to the approach that Will Coxon and I have devised called the blueprint or the hybrid approach and that seems to me the way forward. But again, this won't happen until after September now and there'll be a lot of uncertainty between now and then.